Total Money Market Fund Assets (from Invest. Co Inst) jumped $11.5bn last
week to a record $2.920 TN. Money Fund Assets have now posted a 12-week
gain of $337bn (62% annualized) and a y-t-d increase of $538bn (28% annualized).Money
fund asset have surged $659bn over 52 weeks, or 29%.

Total Commercial Paper added $1.3bn to $1.866 TN. CP is down $357
bn over the past ten weeks. Asset-backed CP fell $23bn (10-wk drop
of $279bn) to $895bn. Year-to-date, total CP has declined $108bn,
with ABCP down $189bn. Over the past year, Total CP has contracted
$27bn, or 0.9%.

Asset-backed Securities (ABS) issuance slowed to $2.3bn this week. Year-to-date
total US ABS issuance of $486bn (tallied by JPMorgan) is running 31% behind
comparable 2006. At $213bn, y-t-d Home Equity ABS sales are 53% off last year's
pace. Year-to-date US CDO issuance of $270 billion is running 4% below 2006.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/17) jumped
$14.4bn to $2.018 TN. "Custody holdings" were up $266bn y-t-d (18.8% annualized)
and $333bn during the past year, or 19.7%. Federal Reserve Credit was little
changed at $858bn. Fed Credit has increased $5.9bn y-t-d and $26.6bn over the
past year (3.2%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.100 TN y-t-d (28% annualized) and $1.240 TN year-over-year
(27%) to a record $5.912 TN.

Credit Market Dislocation Watch:

October 19 - Bloomberg (Hamish Risk and Bryan Keogh): "Credit-default swaps
rose the most in three months this week as a planned $80 billion fund to rescue
structured investment vehicles failed to stop two funds from being unable to
repay debt. Investors are becoming more bearish as losses on SIVs, companies
that borrow in short-term markets to buy longer-dated assets, add to concern
that the fallout from record U.S. mortgage foreclosures may be worse than analysts
had expected. The cost of credit-default swaps, contracts protecting payment
on bonds, rises when the perception of credit quality worsens."

October 19 - Bloomberg (Sebastian Boyd and Neil Unmack): "Cheyne Finance Plc
and IKB Deutsche Industriebank AG's Rhinebridge Plc, two structured investment
vehicles that bought securities backed by home loans, defaulted on more than
$7 billion of debt as the value of their holdings fell. The companies borrow
in the short-term debt market and use the proceeds for buying mortgage-backed
bonds and collateralized debt obligations. Falling market prices for assets
forced the companies to declare all of their debt due this week... 'The fallout
from the credit crisis is far from over,' said Jim Reid, head of fundamental
credit strategy at Deutsche Bank AG... 'There are probably more skeletons in
the closet. The problem is knowing when and where they are going to emerge.'"

October 19 - Dow Jones (Anusha Shrivastava): "The subprime mortgage-based
ABX index is under renewed pressure Friday, with its riskiest slice hitting
a record low and the less risky slices also trading weaker, amid continued
worries over the fallout from the U.S. subprime mortgage crisis."

October 19 - Bloomberg (Bo Nielsen and Min Zeng): "The yen rose the most in
six weeks against the euro as a decline in global stocks prompted investors
to sell higher-yielding assets funded by loans in Japan. Japan's currency gained
for a fifth day versus the dollar, the longest winning streak in almost a year,
and posted its best week against the euro in two months, as the risk of holding
corporate debt increased."

October 17 - Financial Times (Gillian Tett): "A decade ago, when Asia was
facing a financial crisis, American bankers and government officials regularly
travelled to the region delivering homilies about the best way to exit a banking
mess. After all - or so the lectures typically went - America had suffered
bank crises in the past, such as the Savings and Loan debacle of the late 1980s.
This experience had shown that the best route to recovery was to establish
realistic prices for distressed assets, by conducting fire sales if necessary,
and then write the losses off. A decade later, however, it seems that some
US financiers need to take another hefty swig of the medicine they used to
wave at Asia."

October 19 - The New York Times (Eric Dash and Gretchen Morgenson): "Does
the rescue plan for the credit markets need to be saved? The plan is still
being developed, but the roughly $75 billion effort to snap up troubled securities
is struggling to get off the ground, days after it was disclosed by the country's
three biggest banks with the support of the Treasury Department. Citigroup,
Bank of America, and JPMorgan Chase back the plan but are just beginning to
hammer out the details. Bank regulators are aware of the discussions but some
say they are out of the loop. And market participants are puzzled, with investors
like Pimco and T. Rowe Price balking at buying in... But the plan, which was
hatched in August but leaked last week, has been plagued by uncertainties.
All three banks agree on the concept but differ on the details. Other questions
remain. How will the plan work? Who will participate? How much will its backers
put in? 'Until we know the answers, it is tough to say just how much impact
this is going to have,' said Christian Stracke, a CreditSights analyst who
follows S.I.V.'s. At this point, 'It's a big mess.'...So far, the banks agree
on the larger goal: to restore stability and confidence to a vital pocket of
the commercial paper market. They are concerned that if all 30 S.I.V.'s, which
hold about $320 billion in assets, began selling securities at once, prices
would plummet and lead to a lending freeze. But each bank has something different
at stake in participating... Money market fund managers are also divided over
participating. Some say the effort will just delay the inevitable by repackaging
bonds backed by mortgages, loans and other assets that investors know little
about and that have fallen in value."

October 19 - MarketWatch: "Former Federal Reserve Chairman Alan Greenspan
said the 'Super SIV' fund could have serious repercussions, according to an
interview with the Emerging Market newspaper... In the article, Greenspan said
the 'Super SIV' - the $75 billion Master Liquidity Enhancement Conduit designed
to take on the assets of troubled investments - runs the risk of further undermining
already brittle confidence in besieged credit markets."

October 17 - Financial Times (David Wighton): "Big US commercial banks have
seen $280bn of new debt come on to their balance sheets since the credit squeeze,
threatening to undermine economic growth by inhibiting their ability to make
new loans. The banks have been forced to take on to their books large amounts
of commercial paper and leveraged loans after investor demand for such assets
dried up in the summer..."

October 17 - Financial Times (Dave Shellock): "Sky-high oil prices, a worrying
report on US capital outflows and some disappointing corporate earnings set
the scene for another edgy session for financial markets yesterday. The main
shock of the day came from Treasury International Capital data showing that
foreign investors sold a net $69.3bn of long-term US securities in August,
the biggest outflow since 1990. 'A truly stunning Tics number, the likes of
which I have never seen,' said Alan Ruskin, chief international strategist
at RBS Greenwich Capital Markets. Asian investors sold a net $52bn of Treasury
bonds in August, but Tom Levinson, economist at ING, said the real damage to
the headline number came from a near-$60bn negative month-on-month swing in
corporate stock investment... 'One month never makes a trend, but were Asian
Treasury purchases to not rebound in coming months, markets would be left asking
whether a key support for the dollar has begun to wane.'"

October 19 - The Guardian (Phillip Inman and Angela Balakrishnan): "Lending
by the Bank of England to stricken mortgage bank Northern Rock was increased
to £16bn ($32.bn) over the last week, raising fears that the Newcastle-based
bank is running out of funds at a faster rate than expected. Figures released
yesterday show that the Bank of England's balance sheet rose by a further £3bn
in the week to Wednesday, which suggests that Northern Rock was demanding more
funds each week and not less..."

Currency Watch:

October 17 - Financial Times (Peter Garnham): "The meeting of finance ministers
and central bankers from the seven leading industrialised nations in Washington
this weekend comes amid signs of severe strains in global currency markets.
The question is whether they will do anything about it. Ahead of the meeting,
the Europeans are fretting over the impact of a strong euro on the region's
exporters, while the dollar's slide is making a mockery of the US Treasury's
mantra that a strong currency is in the country's interests. In Tokyo, the
yen's slide rings alarm bells as investors show a new interest in carry trades,
in which the low-yielding Japanese currency is sold to finance purchase of
riskier assets elsewhere. Meanwhile, China continues to decline persistent
invitations from the US and Europe to let the renminbi appreciate faster."

October 17 - Bloomberg (David Yong and Wes Goodman): "Japan, China and Taiwan
sold U.S. Treasuries at the fastest pace in at least five years in August as
losses linked to U.S. subprime mortgages sparked a slump in the dollar. Japan
cut its holdings by 4 percent to $586 billion, the most since a new benchmark
for the data was created in March 2000, Treasury Department figures...showed.
China's ownership of U.S. government bonds fell by 2.2% to $400 billion, the
fastest pace since April 2002. Taiwan's slid 8.9% to $52 billion, the most
since October 2000."

October 19 - Bloomberg (Stanley White and Kazumi Miura): "The dollar may 'plunge'
in 2008, prompting the U.S., the European Union and Japan to intervene in foreign
exchange markets, said Eisuke Sakakibara, Japan's former top currency official.
U.S. economic growth may slow to less than 1% next year...he said... Sakakibara,
66, was dubbed 'Mr. Yen' because of his ability to influence the currency market
during his 1997 to 1999 tenure at the Ministry of Finance. 'Should growth fall
below 1%, we could see a plunge in the dollar,' said Sakakibara... 'Some form
of intervention would be necessary to stop it, and that would require coordinated
effort from all three major economies.'"

The dollar index dropped 1.2% to 77.31. For the week on the upside, the Japanese
yen increased 2.5%, the Canadian dollar 1.1%, the Swiss franc 1.2%,, the Brazilian
real 0.7%, the Euro 0.7% and the Danish krone 0.6%. On the downside, the New
Zealand dollar declined 1.8%, the Colombian peso 1.4%, the Indian rupee 1.1%,
and the Australian dollar 0.9%.

Commodities Watch:

October 19 - Bloomberg (Claudia Carpenter): "Gold headed for its biggest weekly
gain in a month as the dollar weakened on speculation the U.S. Federal Reserve
will cut interest rates this month, spurring demand for the precious metal
as an alternative investment."

October 19 - Bloomberg (Halia Pavliva): "Platinum rose to a record in New
York after Anglo Platinum Ltd., the world's largest producer, closed shafts
at its biggest mine."

For the week, Gold gained an additional 2.1% to a 27-year high $765, while
Silver dipped 1.9% to $13.64. December Copper fell 2.8%. November crude surpassed
$90 for the first time, before closing the week with a gain of $4.91 to $88.60.
November gasoline jumped 4.0%, and November Natural Gas gained 1.0%. December
Wheat was little changed. For the week, the CRB index rose 2.0% (up 10.7% y-t-d).
The Goldman Sachs Commodities Index (GSCI) jumped 3.1% (up 30.9% y-t-d).

Japan Watch:

October 19 - Bloomberg (Mayumi Otsuma): "The Bank of Japan remains committed
to raising interest rates as the world's second-largest economy extends its
expansion, Deputy Governor Toshiro Muto said. 'The Bank of Japan will gradually
adjust the level of interest rates in accordance with the pace of improvements
in the economy and prices and check risk factors,' Muto said..."

China Watch:

October 19 - Associated Press: "China's consumer prices jumped 6.2% in September
from a year earlier on higher food costs and the government will consider tightening
monetary policy and investment curbs in response... September's inflation rate
was down slightly from 6.5% in August, the highest monthly rate in 11 years...
'To lower prices will be an important task for our economic regulation,' Zhu
Zhixin, vice chairman of the National Development and Reform Commission...
'Measures may include exercising a monetary policy of moderate austerity, restricting
excessively fast investment in fixed assets and to take measures to adjust
prices,' he said."

India Watch:

October 19 - Financial Times (Joe Leahy): "India has pledged to open the 'front
door' wider to hedge funds in an apparent bid to bolster foreign investor confidence
after a stock market plunge triggered by a proposed crackdown on investment
in the country through offshore derivatives. Hedge funds will be given easier
direct access to the Indian stock market after the proposed curbs that have
raised fears of a rush of selling by foreign investors... Sebi sparked the
stock market plunge on Wednesday by announcing the proposed regulations that
would curtail the sale of derivatives known as participatory notes that are
used by foreign investors, particularly hedge funds, to gain exposure to underlying
Indian shares. The market initially fell 9% on the news amid speculation the
measures would curb massive capital inflows into India's market."

Asia Bubble Watch:

October 17 - Bloomberg (Josephine Lau): "Asia's ranks of people with more
than $30 million in assets is swelling at a faster pace than in the rest of
the world... according to Merrill Lynch & Co. and Capgemini SA. The number
of 'ultra high net worth' individuals increased 12.2% in 2006, compared with
11.3% worldwide..."

October 17 - Bloomberg (Fergal O'Brien): "Irish house prices fell for a third
straight quarter...as the highest borrowing costs in six years and concern
about a property slump deterred buyers, a survey showed. Asking prices for
houses fell 0.7% in the third Quarter..."

October 18 - Bloomberg (Steve Bryant and Ali Berat Meric): "Turkey's ruling
party plans to increase spending by 10% in 2008 as declining debt levels allow
it to loosen budget targets for the first time since coming to power in 2002."

October 17 - Bloomberg (Simone Meier and Andreas Scholz): "European Central
Bank Council member Klaus Liebscher said the bank remains focused on 'significant'
and rising inflation risks, suggesting it may still raise interest rates. 'The
message was and is that risks to price stability are clearly pointing to the
upside,' Liebscher, who also heads Austria's central bank, said... 'There are
significant upside risks' and 'rising oil prices are also increasing these
risks to price stability.'"

October 17 - Reuters: "Former Federal Reserve Chairman Alan Greenspan sees
no imminent danger in the weakening of the U.S. dollar, a Czech newspaper quoted
him as telling a closed-door conference in Prague via a video link... The ex-Fed
chairman said inflation was a far bigger concern for the United States than
the dollar, which was trading at a tolerable level, the newspaper said."

California Watch:

October 18 - Associated Press: "September home sales throughout California
sank to their lowest level in two decades as mortgages became harder to get...
A total of 24,460 new and resale houses and condos were sold statewide last
month. That was down 45.2% from September of 2006 and 26.8% from August, according
to DataQuick..."

October 17 - The Los Angeles Times (Peter Y. Hong and Maura Reynolds): "Home
sales in Southern California plummeted in September to a two-decade low, and
a rash of grim housing-market assessments Tuesday suggested the worst is yet
to come. 'We're on our way down and still picking up speed,' said Christopher
Thornberg, a Los Angeles-based economist... In Southern California in September,
home sales in six counties -- Los Angeles, Orange, Riverside, San Bernardino,
San Diego and Ventura -- fell 48.5% from the same month last year. They were
at their lowest since DataQuick...began compiling such statistics in 1988."

October 18 - Bloomberg (Daniel Taub): "San Francisco Bay Area house and condominium
sales dropped 40% last month to the lowest for a September in two decades as
stricter loan standards kept some homebuyers out of the market, DataQuick...said.
Last month's sales count was the lowest for a September since at least 1988,
when statistics begin for...DataQuick. Banks and other lenders are requiring
homebuyers to make larger down payments and have better credit ratings to qualify
for mortgages."

October 19 - Bloomberg (Jeremy R. Cooke): "California and the Port of Oakland
sold the largest of $7.5 billion in municipal bond offerings as U.S. state
and local government borrowing rose to the highest level in five weeks. California,
whose bond sales this year already exceed the state's issuance during 2005
and 2006 combined, borrowed $1.5 billion to fund civic improvements and refinanced
$1 billion of debt..."

Financial Sector Earnings Watch:

October 17 - Bloomberg (Bradley Keoun): "E*Trade Financial Corp... reported
its first loss in five years and slashed its 2007 forecast because of rising
costs for bad debt at its online bank... Chief Executive Officer Mitchell Caplan's
efforts to build E*Trade's online bank over the past three years by tripling
loans outstanding backfired as more borrowers fell behind on payments and U.S.
home prices dropped."

Mortgage Finance Bust Watch:

October 17 - Bloomberg (Kathleen M. Howley): "The volume of U.S. mortgages
will tumble this year to the lowest since the beginning of the housing boom
as a 'credit shock' restricts lending, the Mortgage Bankers Association said.
The total value of home loans will fall to $2.3 trillion in 2007, the lowest
since $1.1 trillion of loans were made in 2000, before the real estate market's
five consecutive years of record sales and home prices..."

October 17 - Bloomberg (Mark Pittman): "Standard & Poor's lowered ratings
on $23.4 billion of subprime and Alternative-A mortgage securities that were
created as recently as June. The cut covers 1,713 classes of bonds sold in
the first half of 2007... Some debt with the highest AAA rankings were reduced...
S&P's action, in the same year as the securities were created, is its swiftest
mass downgrade of mortgage bonds and the first time 2007 bonds have been cut
by any company."

October 19 - Bloomberg (James Tyson): "Standard & Poor's lowered ratings
on about $22 billion of securities backed by first-lien subprime home loans
because of rising delinquencies. The cut covers 1,413 classes of bonds from
the fourth quarter of 2005 through the fourth quarter of 2006..."

October 17 - Financial Times: "After absorbing staggering losses on their
land holdings in past downturns, home builders have learned to limit risk by
buying options on property instead of purchasing it outright. This time around,
they have left other investors holding the bag - and the fallout has only just
started. US home builders have taken billions of dollars in write-offs this
year after relinquishing deposits on property they no longer need. That land,
which is worth far less than book value, is now stuck on the balance sheets
of a disparate group of property owners across the country. These investment
groups, known as "land banks" and which include GMAC, Acacia Capital, IHP Capital
and Hearthstone, are backed by big US institutional investors... In their eagerness
to sponsor projects, many investors took extra risk by accepting smaller deposits
from builders or looser deal terms. They now have too much property on their
books, paltry deposits to show for it, and lenders breathing down their necks.
Some investors will have to sell properties to stay solvent, causing huge tracts
of land to hit the market at distressed prices. Discounted properties have
already popped up for sale in hard-hit Phoenix, Arizona, and southern California."

October 17 - Bloomberg (Takahiko Hyuga and Mariko Yasu): "Nomura Holdings
Inc., Japan's largest securities company, will post its first quarterly pretax
loss in more than four years after losing 73 billion yen ($620 million) on
U.S. home loans... 'This is extremely regrettable,' Chief Executive Officer
Nobuyuki Koga said... 'The pace of the collapse in the U.S. residential mortgage-backed
securities market was quicker than we expected.'"

Real Estate Bubbles Watch:

October 17 - Bloomberg (Shobhana Chandra and Robert Willis): "The two-year
U.S. housing recession deepened in September... Builders broke ground at an
annual rate of 1.191 million homes... Starts were the lowest in 14 years."

October 17 - Financial Times (Daniel Pimlott): "DR Horton, the largest US
homebuilder by sales, painted a grim picture of the housing market yesterday,
revealing that nearly half of its home orders were cancelled in the three months
to the end of September. The surge in the company's cancellation rate was complemented
by a 39% drop in sales to 6,734 homes, in spite of an aggressive programme
of incentives and price cutting. The dollar value of sales fell by 48%."

October 17 - Financial Times (Ben White and Eoin Callan): "Hank Paulson, the
US Treasury Secretary, warned yesterday that the downturn in the nation's mortgage
market would burden the economy 'for some time' as several big banks, the largest
homebuilder and a major construction equipment maker all highlighted the growing
impact of the housing decline... A monthly survey from the National Association
of Home Builders and Wells Fargo indicated that confidence among homebuilders
had hit its lowest point in more than 20 years."

October 18 - Bloomberg (Daniel Taub): "Apartment rents rose throughout the
U.S. West in the third quarter as home sales slowed and companies boosted hiring...RealFacts
said. The largest increases were in the Seattle and San Jose, California, areas.
The average monthly rent in nine western U.S. states rose 5.5% from a year
earlier to $1,142... In the San Jose, Sunnyvale and Santa Clara area, the average
rent rose 12% from a year earlier to $1,449. In the Seattle, Tacoma and Bellevue
area, it gained 11% to $955."

Fiscal Watch:

October 18 - Bloomberg (Michael Quint): "New York State's looming $4 billion
budget gap will require use of one-time transfers of funds among various accounts
and drawing down reserves, Budget Director Paul Francis said. Francis, also
a senior adviser to Democratic Governor Eliot Spitzer, said he expects 'some
additional revenue' even if profits weaken on Wall Street... Francis said budget
planners expect to limit state operating expense growth to 5.3% in the year
beginning April 1, 2008."

Speculator Watch:

October 19 - Dow Jones: "Wachovia (WB) CEO Ken Thompson says his biggest disappointment
with his investment bank's weak 3Q performance was that it lost roughly $300M
on securities tied to subprime mortgages. He says WB generally steered clear
of subprime exposure, and having those securities in the investment bank represented
'a little bit of a breakdown.' He also expressed surprise that the AAA-rated
securities lost value so quickly. 'We didn't expect that that paper could degenerate
that fast,' he said. Nonetheless, Thompson said he's comfortable with the investment
bank's risk-management systems."

Respite's Over:

The autumn respite from summer Credit tumult has run its course. Global central
bankers may have succeeded at least temporarily in their aggressive liquidity
operations. This liquidity, however, has characteristically avoided risky mortgages
and mortgage-related derivatives. Today, a strong case can be made that Monetary
Disorder was only exacerbated. To be sure, the unfolding spectacular bursting
of the Mortgage Finance Bubble runs unabated. Meanwhile, myriad other global
Bubble excesses went to only more dangerous extremes - certainly including
global equities markets.

It was a week of worrying developments. The degree of mortgage Credit deterioration
was confirmed by the dreadfully rapid earnings deterioration being reported
by the banking industry. And the housing data out of California suggests an
unfolding disaster. If market sentiment doesn't recover soon - as it's not
easy to envision such a scenario in the face of a strangling Credit tightening
- we'll be witnessing a housing bust of historic proportions.

From Wednesday's Los Angeles Times (Peter Y. Hong and Maura Reynolds): "Home
sales in Southern California plummeted in September to a two-decade low...
'We're on our way down and still picking up speed,' said Christopher Thornberg,
a Los Angeles-based economist... According to Dataquick, September Southern
California homes sales were down 48.5% from a year earlier to the lowest level
since at least 1988. Things weren't much better up north. Dataquick puts Northern
California sales down 40% from a year ago. For the entire state, September
sales were down 27% from a terrible August to the lowest sales in 20 years.
The lack of jumbo mortgage availability received widespread blame.

It is an ongoing theme that I don't expect Credit insurance (in its various
contemporary forms) to survive the unfolding downside of the Credit Cycle.
Current tumult in the mortgage derivative arena is cause for concern. The rapid
deterioration in the mortgage insurance business is quite alarming.

October 18 - Bloomberg (Erik Holm): "MGIC Investment Corp., the largest U.S.
mortgage insurer, posted its first quarterly loss in 16 years and said it won't
be profitable in 2008 as foreclosures increase from record levels. The net
loss of $372.5 million...was the worst quarter...since it went public in 1991...
Costs to bail out lenders tripled to $602.3 million as home prices in the biggest
U.S. markets fell, making it harder for banks to recover when loans go sour.
Chief Executive Officer Curt Culver said on a conference call today that real
estate prices may drop 10% nationally over the next 18 months... MGIC wrote
off its $466 million investment in Credit-Based Asset Servicing and Securitization
LLC, jointly owned with Radian Group Inc., after demand for subprime loans
collapsed... Culver blamed much of the surging losses on larger claims from
bigger mortgages and fewer delinquent mortgages being returned to good standing
as housing markets deteriorated, particularly in California and Florida...
The number of borrowers more than 60 days behind on privately insured loans
jumped 30% from year-earlier levels in August... The company is forecasting
declines in home values of 20% in the Phoenix area, 18% in Las Vegas, 13% in
Orlando, Florida, and 7% in Los Angeles over the next two years."

October 18 - Bloomberg (Erik Holm): "PMI Group Inc., the second-largest U.S.
mortgage insurer... said today it will lose $1.05 a share in the period and
withdrew earnings forecasts for the year... The cost to bail out lenders is
expected to increase fivefold from the same period a year earlier to about
$350 million...PMI said... Stagnant home prices make it harder for banks to
recover when loans go bad."

There are certainly grounds today to suggest that the unfolding California
housing bust will test the viability of mortgage insurance industry. MGIC,
in particular, noted increased Credit losses in higher-end homes and in the
Golden State. But I don't believe anyone has modeled in the type of housing
crisis that is developing. This thinly capitalized industry in on the hook
for Trillions of insurance exposure. And as the market begins to question the
ongoing solvency of the insurers, this will create one more major uncertainty
for the vulnerable "private-label" ABS and MBS marketplaces. Moreover, the
thinly-capitalized GSEs have huge exposure to the fragile mortgage insurance
industry. The next stage of the mortgage meltdown is at hand.

Unfortunately, I don't have time this evening to properly highlight what was
a very poor week of bank earnings. Almost across the board, Credit deterioration
was much worse than expected. It will get much worse.

October 19 - Bloomberg (David Mildenberg): "Wachovia Corp. reported its first
earnings decline in six years and missed analysts' estimates after a record
$1.3 billion of writedowns for bad loans and mortgage-backed securities...
Profit at the five biggest U.S. banks totaled $18.7 billion for the quarter,
the lowest in almost four years, as demand for securities linked to mortgages
and leveraged loans dried up... Home foreclosures have forced banks to write
down the value of mortgages and home equity loans. Citigroup, Bank of America
and JPMorgan together wrote down more than $2.5 billion in loans for leveraged
buyouts of companies."

October 17 - Bloomberg (Elizabeth Hester and Charles V. Zehren): "SunTrust
Banks Inc., Huntington Bancshares Inc. and BB&T Corp. posted third-quarter
profits that fell short of analysts' estimates as the worst housing market
in 16 years forced the regional lenders to write down the value of bad loans.
Net income at SunTrust of Atlanta declined 23% while profit at... Huntington
fell 12%... None of the companies had a bigger decline than the second-largest
U.S. lender -- Bank of America Corp. of Charlotte, North, Carolina -- which
said earnings dropped 32% on $4 billion in writedowns and trading losses. Record
foreclosures and a decline in the value of securities related to subprime mortgages
forced the banks to set aside more money to cover future losses. SunTrust,
the third-largest bank in Florida, more than doubled its provision for loan
losses to $147 million and said loans no longer paying interest climbed about
70% to $1 billion."

From Bank of America's Q3 earnings release: "Unprecedented market disruptions
impacted trading results. As a result, Global Corporate and Investment Banking
(GCIB) net income fell 93% to $100 million from $1.43 billion a year earlier.
Capital Markets and Advisory Services, a business within GCIB which includes
Liquid Products, Credit Products, Structured Products and Equities, posted
a $717 million net loss compared with net income of $298 million a year earlier.
Included in the net loss for the quarter were $247 million in markdowns...on
leveraged and non- leveraged loans and commitments. Contributing to the loss
in Credit Products was a $607 million trading revenue loss due principally
to the breakdowns in traditional pricing relationships, which made hedges ineffective,
and the widening of credit spreads. Structured Products, which includes asset-backed
and residential mortgage-backed securities, commercial mortgages, collateralized
debt obligations (CDOs) and structured credit trading had a net revenue loss
of $527 million. The loss arose from lower investment banking fees and trading
declines principally due to the same conditions affecting Credit Products...
Provision for credit losses was $2.03 billion, up from $1.81 billion in the
second quarter of 2007, and $1.17 billion in the third quarter of 2006. Net
charge-offs were $1.57 billion, or 0.80% of total average loans and leases.
This compared with $1.50 billion, or 0.81 percent, in the second quarter of
2007 and $1.28 billion, or 0.75%, in the third quarter of 2006."

From Citigroup's Q3 earnings release: "This was a disappointing quarter, even
in the context of the dislocations in the sub-prime mortgage and credit markets.
A significant amount of our income decline was in our fixed income business...
Fixed income markets revenues declined $1.64 billion to $671 million, driven
primarily by: Losses of $1.56 billion, net of hedges, on sub-prime mortgages
warehoused for future CDO securitizations, CDO positions, and leveraged loans
warehoused for future CLO securitizations. Losses of $636 million in credit
trading due to significant market volatility and disruption of historical pricing
relationships... ending revenues declined 14% to $412 million, primarily driven
by write-downs of $451 million, net of underwriting fees, on funded and unfunded
highly leveraged finance commitments...Net investment banking revenues were
$541 million, down 50% due to write-downs of $901 million, net of underwriting
fees, on funded and unfunded highly leveraged finance commitments... Credit
costs increased $2.98 billion, primarily driven by an increase in net credit
losses of $780 million and a net charge of $2.24 billion to increase loan loss
reserves. In U.S. higher consumer credit costs reflected an increase in net
credit losses of $278 million and a net charge of $1.30 billion to increase
loan loss reserves. The $1.30 billion net charge compares to a net reserve
release of $197 million in the prior-year period..."

It is worth noting that Citigroup expanded its balance sheet by $133bn during
Q3, a 24% annualized rate. Amazingly, Citi's asset have ballooned $608bn during
the past four quarters, or almost 35%. Despite the poor and deteriorating outlook,
Bank of America's Assets increased at an 11.6% pace during the quarter, exceeded
by Wachovia's 19.0%. Big Five (Citi, BofA, JPMorgan, Wachovia and Wells Fargo)
Total Assets expanded $243bn during Q3 - a 15.1% growth rate. Big Five Assets
have inflated 20% over the past year.

October 19 - The New York Times (Floyd Norris): "'The banking system is healthy.'
Ben S. Bernanke, Oct. 15... 'Our bank regulators must evaluate regulatory capital
requirements applicable to bank exposures to off-balance-sheet vehicles.' Treasury
Secretary Henry M. Paulson, Oct. 16. Out of sight, out of mind. As America's
big banks reported poor quarterly results this week, it was hard to know what
was more distressing: the news, or the fact many bankers were clearly surprised.
They were surprised because banking has evolved to the point where a large
part of the revenue comes from things invisible to readers of financial statements,
either commitments to make loans, or through vehicles carefully engineered
to stay off the balance sheet. A notable illustration came from Citigroup.
Its write-offs were half a billion dollars more than the bank had forecast
only two weeks earlier, and its optimism about the fourth quarter was toned
down considerably. But the most impressive fact was the bank's explanation
of why its nonperforming corporate loan total had doubled, to $1.2 billion,
in just three months. Citi explained that the bulk of that came from just one
loan -- and it was a loan that had not even been made a few months earlier.
Citi had taken a fee to provide a backup line of credit to a structured investment
vehicle -- a line that would be called on only if the S.I.V. could not borrow
and a German bank could not meet its promise to make the loan. That happened,
so Citi forked over the cash and immediately put the loan on nonperforming
status. That's a neat trick. You don't make the loan until you know it will
be a bad loan."

It was one of the great myths of this Credit Cycle that the banking system
was much healthier and more stable because of the capacity of contemporary
finance to dis-intermediate bank Credit risk to "the marketplace." It is now
becoming clearer to market participants that the major banks in particular
have huge exposures to myriad risks market and otherwise, previously perceived
as having been distributed to various vehicles, structures and market operators.
The problem is that the preponderance of players active in this non-bank risk
intermediation have been thinly capitalized and often leveraged. Too many were
aggressively writing flood insurance in a drought without the wherewithal to
deal with a flood. There's now a severe one heading our way.

It is both fascinating and alarming to witness the wild inflation in the banking
system balance sheet in the midst of a rapidly faltering Credit Cycle. Not
only are the banks forced now to "re-intermediate" risk they had previously
distributed, they also have no alternative than to take up the slack from an
increasingly impaired Wall Street risk intermediation mechanism. The market
is beginning to appreciate the great risks associated with such a proposition.

It is today's inescapable Credit Bubble Dilemma that enormous quantities of
new Credit must be forthcoming - which entails intermediating Credits that
are at this stage highly risky. For one, they're of high risk because the Credit
system is proceeding toward a major dislocation - one with major ramifications
for the entire economic system. The flow of finance will be altered profoundly,
and many individuals, market operators, business enterprises, and (local, state,
and federal) governments will be forced to adjust. This will amount to a momentous
financial and economic adjustment and we should not expect it will proceed
smoothly.

In the meantime, there is today apparently no alternative than massive banking
system inflation. In just 12 weeks, bank Credit has ballooned $360bn. And as
much as the unfolding mortgage debacle will impair the banking system, I fear
it has already irreparably damaged "Wall Street finance." If upper-end jumbo,
alt-A and home equity loans are the looming disaster that I suspect (significantly
larger in scope than subprime), the viability of the CDO and mortgage derivatives
markets may soon be in doubt. The terrible earnings news this week from the
mortgage insurers plays right into this debacle. If confidence falters in the
GSEs... And the melt-up in Treasury prices only exacerbates MBS instability,
while the (not so quiet) run on the dollar further reduces the appeal of U.S.
mortgage paper to our foreign Creditors.

Stock market complacency over the past weeks was astounding. But if the markets
head directly south from here, market confidence and the Fed's capabilities
will be tested simultaneously. Lower rates are definitely not the answer. Respite's
Over.